After Mitt Romney released his tax returns, there was a minor debate on the left over capital gains taxes. Clearly Romney’s low tax rate was a function of the reduced 15% rate on investment taxes like capital gains and dividends. And some made arguments about how this merely reflected classical economic thinking, that investment should be taxed at lower rates than labor. I responded that this only holds if the investments are productive and not on-paper “investments” that amount to financial bets. Runaway financialization over the past several years means that most of what we consider “investments,” i.e. stock and bond and securities plays, have little to do with productive investment.
Felix Salmon enters this debate with an excellent recap of a study showing labor’s long decline in America.
This chart comes from Margaret Jacobson and Filippo Occhino at the Cleveland Fed, and it’s reasonably terrifying — yet another one of those charts where the trend is down and to the right, and where it’s only gotten worse since the end of the recession.
What you’re looking at here is the share of total national income which is accounted for by labor — a measure that includes wages, salaries, bonuses and things like pension and insurance benefits. Everything else is capital income: interest, dividends, capital gains. There are two ways of measuring this, which is why there are two lines; both of them are telling the same story [...]
It turns out that people with capital are so rich, and getting so much richer, that it’s not even close. All that belly-aching about the plight of savers on fixed incomes in a zero interest-rate environment? Well, you don’t see it in these numbers. Looking at this chart, if you were given the choice between having money and no job, or having a job but no money, it’s not obvious which one to go for.
Something happened around 2000 that separated capital income from the historical norm. It started rising at spectacular levels. I would argue that all the different deregulatory policies of the Clinton Administration’s second term – the Commodity Futures Modernization Act, the repeal of Glass-Steagall – and the general laissez-faire attitude to regulatory policy from both Alan Greenspan’s Federal Reserve and the incoming Bush Administration created a runaway environment for capital that has not abated. Furthermore, capital gains tax rates were slashed in 2001 to 15%, after going down from 28% to 20% in Clinton’s second term. Finally, you have the internationalization of finance, which made capital more nimble. Capital income didn’t just become favored, but enthusiastically endorsed. And of course, this lines up with tax policies favoring the rich in general.
Salmon concludes that we’re going to have to tax capital more, to rebalance this relationship. Getting back to full employment will obviously help labor income rise at the expense of capital as well, but quite obviously we’ve gotten completely out of whack here. This is also a story about income inequality, which has expanded under Obama, even with a recession that usually flattens inequality a bit.
Kevin Drum adds that the favoring of capital over labor gets us into asset bubbles over and over again, another argument for higher capital tax rates. You can talk about a lot of what happened to the economy over the past decade just with this chart. And it signals a way forward that practically nobody is addressing.